Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

In March of 2012, three independent tax preparers represented by the Institute for Justice (IJ) filed a complaint in federal court, challenging the authority of the IRS to regulate tax preparers. Judge Boasberg issued his judgment on January 18, 2013, saying that Congress had never given the IRS the power to carry out a regulatory scheme, which including registering with the IRS for a preparer tax identification number (PTIN) and paying a fee; passing a competency test; and signing on to a number of continuing education credits (unless otherwise exempt). With the opinion, the IRS appeared to concede the loss and yanked PTIN registration and testing registration from its website.

In its response to the IRS’ motion, the Institute for Justice filed an answer in court (yes, this is what we lawyers do – unlike what you see on television, it’s a lot of back and forth arguments on paper), alleging that the IRS exaggerated claims of financial harm and exaggerated other figures. Dan Alban, lead attorney for the plaintiffs, said in response to the IRS’ Motion:

The IRS has repeatedly and grossly misrepresented how the court’s ruling in this case will affect this tax season, tax payers and the IRS itself. The sky is not falling. The judge’s timely ruling preserved the historical status quo that tax preparers have never been licensed by the federal government. The IRS wildly inflates its numbers and now it knows what it feels like to be on the wrong side of an audit.

In its memorandum, the IJ advised that the IRS’ argument of irreparable harm is “completely undercut by its own actions.” Fifteen days prior to the Court’s ruling, the IRS announced – via the IRS Return Preparer Office’s Facebook page but not to the Court – that it would delay enforcement of the continuing education (“CE”) requirement for registered tax return preparers (RTRP) for an additional year. This seems at odds, the IJ argued, with the notion that the failure to allow IRS to further regulate preparers for the current tax season would cause more immediate harm.

The IJ also challenged the IRS’ claims of financial harm. In its motion, the IRS did not distinguish between the RTRP regulations which were struck down, and the separate PTIN regulations, which were not. The disparity, for purposes of dollars, is significant. Additionally, the IRS failed to carve out numbers which reflected preparers subject to the Court’s decision. While the IRS claims that “[o]ver 700,000 preparers have registered with the Service,” the IJ pointed out that only about half that number are actually subject to the RTRP regulations; the remainder are attorneys, CPAs, and enrolled agents (EAs). And in its motion, the IRS claimed the court’s ruling would cost $4,000,000 each month going forward in lost revenue; the IJ argues that only $192,697 in revenue would be lost due to the RTRP regulations being struck down, a 2,000% difference.

I happen to think the real answer is somewhere in the middle. I don’t think the IRS’ argument for imminent harm on the basis of lost revenue makes sense – especially since they’ve admitted that they haven’t yet spent half of the fees collected to date (although the specter of refunding those fees has to make them quake in their boots). On the other hand, while the language of the injunction does not specifically bar the collection of PTIN fees from all preparers, realistically, the purpose of the PTIN was to regulate/track paid preparers. The IRS ought not to be able to collect a random fee – or require registration – that would interfere with commerce without a reason. And if the reason (regulation) has been struck down, it doesn’t make sense to continue to require registration. The IRS clearly recognizes this: that’s why the PTIN piece of their own website is down after the ruling. It would make sense, then, that the IRS would include all of those fees in its loss calculations – even though, again, I don’t consider the loss of revenue (for a program that they created) to be irreparable harm.

The IRS also claimed that it would suffer unspecified “costs associated with . . . finding other positions for the 167 Service employees currently working on the return preparer project.” Alban noted, in response, that just over two weeks ago, the IRS complained about understaffing, since “[o]verall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.” You’d think that the IRS would welcome, not rue, the idea of having nearly 200 employees available for other tasks – like answering the phone (at current staff levels, they only do that about 70% of the time).

The IJ has referred to the ruling as a victory for entrepreneurs and hopes that the injunction won’t be disturbed on appeal. The IJ has also argued that there is no reason to suspend or stay the injunction before a proper appeal can proceed because, they claim, there’s no harm to IRS in allowing that to happen. But what about the argument that without regulation, taxpayers are at risk? The Plaintiffs had this to say:

For the 100-year history of the modern income tax, tax preparers have always been free to assist taxpayers in preparing returns without obtaining a license from the IRS or any other federal agency, and taxpayers have always been free to hire whomever they pleased to prepare their tax return. This Court’s timely injunction thus preserved the status quo of the past century.

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